Does Firm Size Matter?: A study of the relationship between relative valuation and firm size

Abstract: Buy-and-build strategies have recently become a common way for private equity firms to create value from their portfolio companies by i.a. increasing their size. Finance theory, on the other hand, gives no support that there should be a relationship between relative firm valuation and mere size. This paper provides an empirical study of 5,790 transactions that occurred during 1994 and 2007. We found that, on average, there is no significant relationship between a firm’s valuation multiple and its size, in terms of sales. However and interestingly, for subsamples, we found that such a positive relationship exists and is especially strong for small-sized firm, stagnates for larger firms and eventually turns negative for the largest firms. Roughly, the relationship is positive for firms with revenues between USD 20-50m and negative for firms with revenues between USD 300-600m. This has implications for when this relationship may be true and when buy-and-build strategies may result in multiple expansion.